The Powers and Limitations of IRS Auditors by Kyle Dickmann

No matter the time of year, the IRS Audit and Enforcement people are always on the prowl for new cases, and their first step, should you find yourself in their crosshairs, is almost always the audit.

Dealing with an audit, even if only via correspondence, is never fun — nor is it something to be done without effective representation.

That said, there is good news: IRS auditors do not have the final say.

Here’s what I mean…

The Powers and Limitations of IRS Auditors by Kyle Dickmann“Things are never quite as scary when you’ve got a best friend.” -Bill Watterson

Before the IRS can finalize an audit, they are required by law to give you rights to dispute it in federal Tax Court and with an IRS appeals officer.

Before any audit becomes final, the IRS must notify you of your rights to dispute it. This letter is called a “Notice of Deficiency.” This notice gives you the right to take the IRS audit to Tax Court and have an independent judge review it. You will have 90 days to file a petition to Tax Court after the IRS sends you the notice of deficiency.

And even if those 90 days have already expired, you may still qualify for “audit reconsideration” instead.

Now, before the IRS goes to trial, they typically send your case to an IRS Appeals Officer for settlement. The IRS Appeals Officer’s job is to settle the case based on how a judge might rule, not on how an auditor might rule. As a result, these IRS Appeals Officers have flexibility not always shown by auditors. Most IRS examination cases settle this way, with results not available when only going through the typical audit channels.

You see, Tax Court judges and IRS Appeals Officers perceive cases differently from IRS auditors. If you feel that you are being unnecessarily or over-aggressively audited (and have evidence or can make effective testimony thereof), you can summarize to the Appeals Officer what you will tell the judge. If the Appeals Officer — in preparation for trial — can see that their auditor was being unreasonable, they can often make different kinds of attempts to settle the case in anticipation of how an independent judge might rule.

The auditor often has a small view of your case and does not consider how outsiders would decide it; that changes when the final decision is not in the hands of the IRS, but of the Tax Court.

That said, here is what an IRS Auditor CAN do…

The Tax Law specifically places the burden of proof on you to back up what is on your tax return.

Proving the correctness to an auditor is not easy. The IRS wins over 80% of all audits, often because people are not able to properly verify data on their tax returns. Recordkeeping is the downfall of most audit victims.

Congress gives the IRS broad, but not unlimited powers in auditing. The IRS, in the course of an audit, may:

Auditors look for personal expenses disguised as business deductions. With small businesses, the IRS Auditor is ever on the lookout for people who bury personal expenses in their business records. Cars, Travel and Entertainment are often targets. In these areas particularly, it quite literally pays to keep good records.

In all of this, and other instances … well, it’s helpful to have a pro on your side.